The market action at the end of the day Friday stunk.
Stocks had a nice recovery going off of the opening decline. But, sellers stepped up in the final 30 minutes. The S&P ended the session where it started – testing last Thursday’s low at 2632.
The market posted a decline during Thanksgiving week – which happens only about 20% of the time. This proves that seasonal factors – while they’re still the “odds-on” favorites for a bet – don’t always pay off as expected.
Strong selloffs on Friday are usually a bad sign for the following Monday. So, don’t be surprised by a lower opening to kick off this week.
But, I think most traders should look to buy that lower opening.
Investor sentiment is miserably bearish. The American Association of Individual Investors (AAII) survey shows the largest percentage of bears, and lowest percentage of bulls, all year. The AAII survey is best used as a contrary indicator. Investor sentiment is often most bearish at the lows of the market, and most bullish at the highs.
So, from a contrary viewpoint, the AAII report is bullish.
Consider also the technical conditions are stretched to the downside. (The S&P closed more than 50 points below its 9-day exponential moving average (EMA), and 160 points below its 40-day moving average (MA)).
So, as much as I think the stock market is headed for a rough patch in 2019, the short-term setup looks poised for one heck of a short-term oversold bounce.
Look at this 60-minute chart of the S&P 500…
This chart has morphed into a falling wedge pattern with positive divergence on the MACD and RSI technical indicators. A breakout to the upside of the wedge should produce a short-term rally (three to four days) of at least 50 points – which would line up well with the 50-day moving average line.
Since the S&P 500 is already quite oversold on the daily chart, I really don’t see a lot of downside risk from here.
Don’t get me wrong… Most traders are sitting like birds on a wire. They’re ready to fly away at the first sign of trouble. So, there’s always the potential for a quick flush lower. And to me, the longer-term picture seems to be shifting to bearish.
But, if you ask me where I think the odds favor stocks heading over the next two weeks… I have to say higher.
Investor sentiment is simply far too bearish at this point to justify a large downside move. Seasonal factors – which, admittedly, have been horribly inconsistent this year – are shifting in favor of the bulls. And stock valuations have fallen back into reasonable levels – not cheap, but not expensive either.
So, if we don’t get a bad trade headline over the weekend, then I think stocks are headed higher this week.
Best regards and good trading,
In today’s mailbag, one Delta Report subscriber is thankful for Jeff’s Delta Direct blog (subscribers can access it here)…
Happy Thanksgiving, Jeff! Thanks for sharing your knowledge and experience in the markets and providing profitable ideas and recommendations, and continually keeping us updated every day in Delta Direct.
Do you think stocks are headed higher next week? Did you do any trading over the Thanksgiving holiday?
As always, send any other trading questions, suggestions, or stories to [email protected].